TOBACCO and insurance giant BAT Industries is considering a possible pounds 8bn-plus future spin-off of its financial services division, which includes Eagle Star and Allied Dunbar, as part of a wide-ranging strategic review.

BAT has always denied demerger talk, but sources close to the board say nothing has been ruled in, or out, as BAT shakes up the operation after its recent pre-occupation with worldwide tobacco expansion.

"Financial services is at a crossroads. BAT is looking at either building it up, floating it, or selling it," said one source, adding that the group has already received at least one serious bid approach.

BAT, Britain's seventh biggest firm, valued at pounds 17bn, is the world's second biggest tobacco company behind Marlboro, the US owner of Philip Morris.

Via Eagle Star, Allied Dunbar and Farmers in the US, it is also the biggest British-based insurer, outranking the Prudential.

Spin-off speculation last surfaced in November, prompted by the creation of a worldwide UK tobacco headquarters to exploit its brands on a global basis.

After years of ploughing cash flow into insurance, tobacco is once again a substantial growth story for BAT.

Last year, it bought America Tobacco for $1bn (pounds 650m), and since the collapse of communism it has made great strides in Russia, Asia and eastern Europe - most recently with a $155m investment in Poland, a bigger market than the UK. China tops the list for future growth.

Behind the scenes, however, financial services chief, George Greener, formerly with Mars, has been implementing a fundamental rebranding using outside experts, Gemini Consultants.

BAT has already combined Eagle Star's and Allied Dunbar's investment operations in Threadneedle Asset Management, with more than pounds 30bn of funds.

The report caused consternation at Eagle Star, whose life insurance operations are perceived as weaker than Dunbar's.

"It's not got critical mass yet. They've got to do something. It doesn't work well together. That's what Greener is making them face up to," one source close to BAT said.

BAT has made no secret of its ambition to buy a bank or building society to distribute insurance and pensions,but as yet the numbers have not stacked up.

A BAT spokesman, confirming that spin-off options have been looked at, said expansion was uppermost in its plans, pointing to Spain, Portugal and Italy as favoured areas outside the UK.

"We constantly look at these things. But if anyone thinks anything is going to happen immediately, they are really getting ahead of themselves," the spokesman said.

BAT has been dogged by break-up talk ever since it sold off Argos, Saks Fifth Avenue and paper maker Wiggins Teape to fend off Sir James Goldsmith's pounds 13.9bn hostile bid - Britain's biggest ever - in 1989.

Financial services is on course for profits of more than pounds 1bn this year, up from pounds 900m in 1994, but analysts see hurdles for any spin-off. The UK operations have no synergy with Farmers, which is itself tough to value, though a pounds 9bn valuation of tobacco before debt, leaves financial services worth more than pounds 8bn.

Crucially, US tobacco litigants might also claim a spin-off would cut the pool of assets available for compensation.